WASHINGTON, D.C. (1/30/14)--Wednesday's vote by the Federal Open Market Committee to continue to reduce its asset-bond purchases by $10 billion per month shows the Fed is committed to exiting the quantitative easing program, said a Credit Union National Association expert.
The FOMC statement "confirmed to market participants that the $10 billion reduction in the pace of asset purchases announced in December was not a head fake," said CUNA Senior Economist Steve Rick.
"Even though the Fed said its 'asset purchases are not on a preset course,' if the Fed continues to decrease its asset purchase program by $10 billion every six weeks, the Fed will exit the quantitative easing program by its Dec. 17 FOMC meeting," he said.
Starting in February, the Fed will add $30 billion per month rather than $35 billion per month in mortgage-backed securities to its holdings. Longer-term Treasury securities will drop to $35 billion per month down from $40 billion per month. The Fed's balance sheet is just shy of $4 trillion--$1.43 trillion in mortgage-backed securities and $2.14 trillion in Treasury securities.
After Wednesday's announcement, the 10-year Treasury interest rate dropped to 2.67%, the lowest in two months. "Nevertheless, we expect the 10-year Treasury interest rate to rise over 3.25% as faster economic growth and Fed tapering reduce the demand and increase the supply of government debt," Rick said. "Higher long-term interest rates will boost credit union yield on assets this year, bringing to an end the four-year slide in credit union net interest margins."
He said there was no real change in the Fed's forward guidance on when short-term interest rates would begin to rise.
The FOMC statement said it "continues to anticipate ... that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%, especially if projected inflation continues to run below the Committee's 2% longer-run goal."
"The operative phrase in that sentence being 'well past,'" Rick said. "We don't expect an increase in the fed funds rate in 2014, which in turn means credit union cost of funds will remain at record-low levels for another year."